21 Feb 2012

Scrap the stock market?

Those of you courageous enough to read the hundreds of posts that I have put on my blog since october 2010 will know that there are essentially two things that I have been arguing for. First, scrapping the current system of taxation, and replacing it by a single flat rate financial transaction tax with a variable rate that is adjusted to provide the amount of revenue needed to match government expenditure. Second, taking away the right of commercial banks to create money, and transferring that function to central banks under control of elected governments.

But, after reading Ha-Joon Chang's latest comment piece in the Guardian entitled "It's time to start talking to the City", I think it's maybe time that I added a third theme. Chang, who is the author of the excellent "23 things they don't tell you about capitalism", included the following gems in his piece.
"According to William Lazonick – a leading authority on this issue – between 2001 and 2010, top UK firms (86 companies that are included in the S&P Europe 350 index) distributed 88% of their profits to shareholders in dividends (62%) and share buybacks (26%).

During the same period, top US companies (459 of those in the S&P 500) paid out an even greater proportion to shareholders: 94% (40% in dividends and 54% in buybacks)."
In april 2008,  Nicolas Sarkzoy annouced that "in the next fifteen days" he would implement a reform that he called "one third, one third, one third" rule. According to this proposal, company profits should be split with one third for the employees, one third for investment, and one third for shareholders.

It's a nice idea, but complete fantasy. In his five years as president, Nicolas Sarkozy has done virtually nothing to get this idea imposed. Indeed, a couple of years ago, the Canard Enchainé (again!) reported that one semi-public French company (France Telecom, I think) actually paid out four thirds (133%) of its profits in dividends. They managed that by borrowing the money to pay the dividends. It's complete lunacy.

I posted a comment on Ha-Joon Chang's piece where I said the following:

"I presume that the whole reason for having a stock market is so that companies can raise capital. In other words, by going public, a company can get a substantial amount of money that it might then use for investment.

But, here's a question for Ha-Joon Chang and any other economist. If company raises 10 million by going public, but then pays 94% of it's profits in dividends over the next decade, what is the effective rate of interest that they have been paying on the money they got? Answers on a postcard please.

If it costs more to finance via the stock market than by borrowing from a bank, then is there any point in having a stock market at all?

And, finally, what would be the effect of just abolishing the stock market completely? Would it prevent the economy working? Or would it, as I suspect, mean that companies would end up using their profits for investment and paying their employees, as they should do?"
So, maybe my next campaign for economic reform will be to propose that we simply scrap the whole idea of publicly-owned companies. No stock markets. All the shares in the company should be transfered to employees and ex-employees.  Comments very welcome.


  1. To your first question - there's no way of telling as we don't know what the dividend payments were. 

    To your second question - yes there is a point. Equity finance is fundamentally different from debt in that the equity shareholders participate directly in the success of the company through their ownership of it, whereas those lenders don't. Equity shareholders are the last to be paid if a company is wound up, whereas loans take priority. 

    Equity is riskier than debt and produces both higher and lower returns.

    Lastly, you wonder if abolishing the stock market would lead to companies reinvesting profits and paying their employees. Most healthy companies already do that - but I suppose you mean would they do more of these 'worthwhile' activities at the expense of the former owners whom you seem ready to disenfranchise. 

    Well possibly - but on that basis you might as well distrain lots of private property that is just lying around and hand it out to those who would like some more. 

    The point about the stock market is that it is a mechanism for people to own companies at arms-length. Through shareholdings held directly or more often managed via pension and investment funds. 

    You haven't said what you think is wrong with the owners taking cash out of their businesses in the form of dividends - it is after all their business. Would you recommend the same approach for every business? There is no fundamental difference between an unlisted and a listed company in that respect. 

    There are many problems with arms-length ownership and management - but I just don't think this is one of them. 

  2. Jrussell88

    You may be interested to know that I actually set up a company in 1999 - and it's still going, with 10 employees. I'm proud of that. I'm still a shareholder - and all the shareholders are all directly involved in the company. This is good. And if the shareholders get paid dividends I would not be shocked at all. As it happens, we've not had any dividends because the money the company makes all goes into investment and paying salaries.

    At one point, someone tried to convince me to allow the company to be floated via a shell company on the AIM market in London. Thank god I didn't agree. We would have to fight to keep the share price abnormally high to prevent sharks taking the company out by buying up all the shares. It's this requirement to keep the share price up all the time that explains why 94% of profits end up going to the shareholders.

    Personally, I see no real advantage in going public - except that it is a way to allow the original shareholders to make a pile of money. Do you know of any cases where going public has been good for the long term interests of a company?  If Facebook or Glencore go public, is it because they lack funds for investment?  It seems unlikely. If Facebook really needed more cash, it could easily go directly to investors and say we'll give you 10% of the company for $10 billion (or whatever). I'm sure that someone would say yes. No, I really don't see why floating companies on the stock market is useful.